Why the 1929 Chart Is a Bunch of Nonsense

It’s time, once and for all, to put an end to all the drama surrounding the stock-market chart comparing now to the crash of 1929.

The chart has swept across trading desks over the past several days, with many Wall Streeters scratching their heads as to how a chart with so many pitfalls in its construction could garner so much attention.

“I have been in this business for over 43 years, yet I do not ever recall getting as slammed with the same email as many times as I have about the attendant 1929 comparison chart,” says Jeffrey Saut, chief investment strategist at Raymond James.

The real problem lies with how the chart was constructed. Mr Saut explains:

“You can ‘scale’ any chart to do just about anything you want it to imply! In this case, the scale makes the comparison to 1929 with the present stock market chart pattern appear eerie. However, if you index that same chart so that you are comparing apples to apples, the correlation to 1929 disappears. Moreover, I have been around long enough to have seen this “act” before. The time period was the 1980s – 1990s when ‘they’ were trying to scale Japan’s Nikkei Index to that of the Dow Jones Industrial Average. All these kinds of chart shenanigans prove is that, ‘Where you stand is a function of where you sit, or that you can make numbers do anything!’”

Here’s a look at the chart comparing point moves and percentage moves. On a percentage basis, this spooky comparison doesn’t look quite so frightful.

Raymond James

Other market watchers have also blasted the chart. In a note to clients, Daniel Wiener, chief executive at Adviser Investments in Newton, Mass., blamed the Internet for the ruckus this chart has caused.

“Before the Internet these charts would never have seen the light of day, or if so they’d have been seen, and dismissed quickly,” Mr. Wiener said. “Not so today’s ‘eyeball seeking’ web sites that work hard to capture your attention whether they are selling snake oil or…snake oil.”

Josh Brown, an investment adviser and author of the Reformed Broker blog, penned a post this week titled “The Chart That Wouldn’t Die.” While the “click bait” associated with anything 1929-related is one of the reasons bloggers love writing about this topic, he also points to a few reasons to be concerned about this chart garnering so much attention.

From Mr. Brown:

“The reason why this bothers me is twofold – first, it frightens investors into making poor decisions – big decisions that will have a major impact on their mental health and financial condition well into the future. Second, the more we see this kind of pornography, the more likely it is to have an impact on crowd psychology and become a self-fulfilling prophecy. It’s like putting a disturbed, isolated teenager in front of violent first-person shooter video games all day. If we know that most Americans are scared to invest in their own future, what’s the reason to fuel that fear even further? Sadism? Or just plain exploitative greed?”

The irony in all of this is the stock market has done quite well since the fear mongering over this chart surfaced. The S&P 500 rose 5.1% from Feb. 3 through Thursday’s close and is up again on Friday. It is less than 1% away from turning positive for the year.

The bottom line: “There are always too many variables for the chart overlay game to be able to call a crash, and the variables themselves are never the same,” Mr. Brown said.

Frankly, it’s time to put the “scary parallels” between now and 1929 to rest. This isn’t 1929. Not even close. Anyone who tells you differently is talking nonsense.